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US dairy oversupply driving prices down as milk production increases
By Bruce Jobson
The free-market economy of the US dairy industry is being tested to the full, with farmers trapped in a catch-22 situation.
Nearly 3,000 US dairy farms left the industry in 2018, a decline of 6.5 per cent and, since 2013, overall farm income has been cut by 50 per cent.
The US dairy industry is a product of its own free-market success. And, lamentably, is leading to its demise. The reason is simple: the US is producing more milk than the market requires.
The country’s milk production continues to outpace demand, despite 6.5 per cent of producers quitting the industry last year.
Production continues to increase year-on-year and herds get bigger and expansion replaces any shortfall.
According to United States Department of Agriculture (USDA) figures, milk production continues to increase on an annual basis, about 1 per cent in 2018.
The latest figures for August 2019 show an increase of 0.4 per cent over the same month in 2018.
Oversupply has forced down milk prices to unsustainable levels and the average farm is financially haemorrhaging.
The US dairy industry had a bumpy ride during the previous decade, but had recovered by 2014, resulting in record high milk prices.
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The free-market response to higher milk prices was to increase cow numbers, sell more milk and take advantage of market prices.
By 2016, dairy farms were producing more milk than the system could handle. Prices declined by 33 per cent from $24/100lb (cwt) of milk (£20/cwt) to $16/cwt (£13/cwt), according to USDA figures.
Reductions
Overcapacity resulted in consumer price reductions from an average November 2014 high of $3.85/US gallon (£3.20/US gallon) to $2.85/US gallon (£2.37/US gallon) in December 2018, a 26 per cent drop.
US farmers cast envious eyes at the Canadian Supply Management System, with some urging the Government to regulate milk production.
Any US Government control goes against the free-market principles of the US economy.
Recent US international trade agreements (CETA, CPTPP and CUSMA) gained 8.4 per cent access to Canadian dairy markets.
However, the US cannot merely seek to export dairy products in an already oversupplied global market to solve its domestic oversupply challenges.
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